Observers have pointed to the 10% increase in the Baltic Dry Goods exchange this year and the dramatic rise of iron ore shipments to China as evidence that the market has turned and China is coming roaring back. China imported a record tonnage of iron ore in February as steel makers turned the blast furnaces back on, apparently in the belief that the Chinese stimulus package would create a dramatic increase in steel demand. The China Iron and Steel Association is reported in Reuters as proposing a rise in the value-added tax rebate for exported products including cold-rolled steel to 17% from 5%, and re-introducing a 13% rebate on exported hot-rolled steel. These steps would boost the competitiveness of Chinese steel on the world market and help overcome the disadvantage Chinese producers have found themselves at compared to Russian mills.
Interesting as these figures are, however, they can’t be looked at in isolation. With domestic demand and prices (see MetalMiner IndX) still subdued and exports in February at a 38 month low there is not an obvious home for all this steel. True, Chinese consumer stocks are low but there is little evidence that they are ready to massively re-stock and while figures show a 26.5% first quarter increase in lending in urban investments, such as roads, rail, power and so on suggesting that China’s investment projects may be taking off quicker than in the west, it would be quite a leap of faith for the whole industry to re-stock in the belief this is going to turn around the wider manufacturing market. The rise in iron ore orders will not help the Chinese in their 2009 price discussions with iron ore producers as any increase in shipments supports the producers belief that demand is going to come back strongly. In reality, with over 30% of Chinese manufacturing geared toward exports and ultra cautious prone-to-save-consumers, the government’s stimulus package is the only glimmer of hope for an early turnaround for China Inc.